Title: Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One
Author: Meghnad Desai
Publisher: Collins Business India
Pages: 304; Price: Rs 399
Baron Desai of St Clement Danes is easily recognisable; no other baron or Desai sports such a luxuriant hairline. He is also a diligent economist. Retirement from his chair in London School of Economics especially charged him up. He has written at least seven books in the last decade, covering much ground from Karl Marx to Dilip Kumar.
In this book, he gives his answer to the question in the title. The answer is not complicated, but he wanders across centuries and continents before he comes to the point. On the whole, though, the wanderings are fascinating.
Desai begins with the Spaniards’ depredations in the Americas after Columbus crossed the Atlantic — the tons of gold and silver they brought back made it unnecessary to produce anything else, generated massive inflation, and finished off Spain as a great power. That leads him to the British philosophers John Locke, David Hume and Adam Smith, whose reflections were the beginning of British economics. The Bank of England’s solution to the inflation problem was the gold standard — fixing and maintaining a constant price of gold. That could run up against a balance of payments problem, and it did: during and after Napoleonic wars, the Bank had to go off the gold standard.
He then gives a brief chapter to trade cycles. It is a pity he does not linger longer, because they are central to his final answer. The continental economists who did extensive work on trade cycles at the turn of the 19th century — Kondratieff, Juglar, Kitchin, Schumpeter, Wicksell and Max Weber (whom Desai misses out) were pioneers in empirical economics. Trade cycles disappeared for some decades after World War II, so these economists were forgotten. But if one wants to answer Desai’s question, they are the economists to turn to. A chapter is devoted to quantity theory, the multiplier and the Cambridge economists — Marshall and Pigou — with whom are bundled up the remaining economists of the trade cycle — Kuznets, Slutsky, Cobb, Douglas, Mitchell etc.
That leads Desai to John Maynard Keynes, his followers and critics. He has his own angle on Keynes — that Keynes clothed his ideas in the language of his predecessors to make them more acceptable. Desai is tentative on the battle between Keynes and American neoclassicals. Keynes died early, before he could give much time to explaining and disseminating the General Theory, whereas his American critics continue to thrive till today. The idea of general equilibrium generates some neat algebra; but economies are interesting only because they are not in equilibrium — they are always changing, and often unstable.
When he comes to the last half century, Desai gives less space to its economists, and more to his basic question. He meanders on to his answer, which is that a new Kondratieff cycle started in the 1970s, and reached its peak in 2008, after which we entered its downturn phase. If he is right, the world economy will do badly for some decades. This is a pretty depressing conclusion, though it does not sound so bad the way Desai puts it. Nor does one have to take it seriously, for Desai gives no empirical data to back up his conjecture. Ever since Schumpeter wrote his magnum opus on the trade cycle, various economists have gone off looking for them, but not found one in recent times. Trade cycle theory is great fun, but it is not clear whether it is theory, or history of economic thought.
Ashok V Desai is an extinguished economist and aspiring wordsmith.